04
Student: ___________________________________________________________________________

1.

Phil is working on a financial plan for the next three years. This time period is referred to as which one of
the following?
A. financial range
B. planning horizon
C. planning agenda
D. short-run
E. current financing period

2.

Atlas Industries combines the smaller investment proposals from each operational unit into a single
project for planning purposes. This process is referred to as which one of the following?
A. conjoining
B. aggregation
C. conglomeration
D. appropriation
E. summation

3.

Which one of the following terms is applied to the financial planning method which uses the projected
sales level as the basis for determining changes in balance sheet and income statement account values?
A. percentage of sales method
B. sales dilution method
C. sales reconciliation method
D. common-size method


7.

The internal growth rate of a firm is best described as the:
A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable excluding external financing of any kind.
D. maximum growth rate achievable excluding any external equity financing while maintaining a constant
debt-equity ratio.
E. maximum growth rate achievable with unlimited debt financing.

8.

The sustainable growth rate of a firm is best described as the:
A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable excluding external financing of any kind.
D. maximum growth rate achievable excluding any external equity financing while maintaining a constant
debt-equity ratio.
E. maximum growth rate achievable with unlimited debt financing.

9.

You are developing a financial plan for a corporation. Which of the following questions will be
considered as you develop this plan?
I. How much net working capital will be needed?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?
A. I and IV only

E. I, II, III, and IV


13. Which one of the following statements concerning financial planning for a firm is correct?
A. Financial planning for fixed assets is done on a segregated basis within each division.
B. Financial plans often contain alternative options based on economic developments.
C. Financial plans frequently contain conflicting goals.
D. Financial plans assume that firms obtain no additional external financing.
E. The financial planning process is based on a single set of economic assumptions.
14. You are getting ready to prepare pro forma statements for your business. Which one of the following are
you most apt to estimate first as you begin this process?
A. fixed assets
B. current expenses
C. sales forecast
D. projected net income
E. external financing need
15. Which one of the following statements is correct?
A. Pro forma statements must assume that no new equity is issued.
B. Pro forma statements are projections, not guarantees.
C. Pro forma statements are limited to a balance sheet and income statement.
D. Pro forma financial statements must assume that no dividends will be paid.
E. Net working capital needs are excluded from pro forma computations.
16. When utilizing the percentage of sales approach, managers:
I. estimate company sales based on a desired level of net income and the current profit margin.
II. consider only those assets that vary directly with sales.
III. consider the current production capacity level.
IV. can project both net income and net cash flows.
A. I and II only
B. II and III only
C. III and IV only

D. retained earnings.
E. common stock.
21. Which one of the following policies most directly affects the projection of the retained earnings balance
to be used on a pro forma statement?
A. net working capital policy
B. capital structure policy
C. dividend policy
D. capital budgeting policy
E. capacity utilization policy
22. You are comparing the current income statement of a firm to the pro forma income statement for next
year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85
percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the
dividend payout ratio are fixed. Given this information, which one of the following statements must be
true?
A. The projected net income is equal to the current year's net income.
B. The tax rate will increase at the same rate as sales.
C. Retained earnings will increase by four percent over its current level.
D. Total assets will increase by less than four percent.
E. Total liabilities and owners' equity will increase by four percent.
23. A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of
the following account values when compiling pro forma statements?
A. sales
B. costs of goods sold
C. accounts receivable
D. fixed assets
E. long-term debt
24. Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of
sales?
A. 0.70
B. 0.86

28. Which one of the following will increase the maximum rate of growth a corporation can achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
29. Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are
expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working
capital and operating costs are expected to increase directly with sales. The interest expense will remain
constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and
projected net income is positive. Which one of the following statements is correct regarding the pro forma
statement for next year?
A. The pro forma profit margin is equal to the current profit margin.
B. Retained earnings will increase at the same rate as sales.
C. Total assets will increase at the same rate as sales.
D. Long-term debt will increase in direct relation to sales.
E. Owners' equity will remain constant.
30. A firm's external financing need is financed by which of the following?
A. retained earnings
B. net working capital and retained earnings
C. net income and retained earnings
D. debt or equity
E. owners' equity, including retained earnings
31. Sales can often increase without increasing which one of the following?
A. accounts receivable
B. cost of goods sold
C. accounts payable
D. fixed assets
E. inventory
32. Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this

D. assumes the debt-equity ratio is 1.0.
E. assumes all income is retained by the firm.
37. If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income
and excess capacity, then the:
A. maximum capacity level will have to increase at the same rate as sales growth.
B. total assets will have to increase at the same rate as sales growth.
C. debt-equity ratio will increase.
D. retained earnings will increase.
E. number of common shares outstanding will increase.
38. Sal's Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue additional equity
shares but does want to maintain its current debt-equity ratio and its current dividend policy. The firm is
profitable. Which one of the following defines the maximum rate at which this firm can grow?
A. internal growth rate × (1 - 0.10)
B. sustainable growth rate × (1 - 0.10)
C. internal growth rate
D. sustainable growth rate
E. zero percent
39. Which of the following can affect a firm's sustainable rate of growth?
I. capital intensity ratio
II. profit margin
III. dividend policy
IV. debt-equity ratio
A. III only
B. I and III only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV


40. Financial plans generally tend to ignore which one of the following?

A. $303.33
B. $327.18
C. $334.43
D. $338.70
E. $341.10
45. Wagner Industrial Motors, which is currently operating at full capacity, has sales of $29,000, current
assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5 percent profit margin.
The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends.
Sales are expected to increase by 4.5 percent next year. If all assets, short-term liabilities, and costs vary
directly with sales, how much additional equity financing is required for next year?
A. -$259.75
B. -$201.19
C. $967.30
D. $1,099.08
E. $1,515.25


46. The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has
a 30 percent dividend payout ratio. What is the projected increase in retained earnings?
A. $14,700
B. $17,500
C. $18,300
D. $20,600
E. $21,000
47. Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of the firm's capacity.
What is the full capacity level of sales?
A. $31,755
B. $36,250
C. $48,667
D. $51,333

52. Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset
turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth?
A. 9.13 percent
B. 9.54 percent
C. 9.89 percent
D. 10.26 percent
E. 10.85 percent


53. R. N. C., Inc. desires a sustainable growth rate of 4.5 percent while maintaining a 40 percent dividend
payout ratio and a 6 percent profit margin. The company has a capital intensity ratio of 1.23. What equity
multiplier is required to achieve the company's desired rate of growth?
A. 1.33
B. 1.38
C. 1.42
D. 1.47
E. 1.53
54. A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent. The capital
intensity ratio is 1.2 and the debt-equity ratio is 0.64. What is the profit margin?
A. 6.28 percent
B. 7.67 percent
C. 9.47 percent
D. 12.38 percent
E. 14.63 percent
55. Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity
financing. The firm maintains a constant debt-equity ratio of .0.55, a total asset turnover ratio of 1.30, and
a profit margin of 9.0 percent. What must the dividend payout ratio be?
A. 26.26 percent
B. 38.87 percent
C. 49.29 percent

B. 40 percent
C. 50 percent
D. 60 percent
E. 67 percent
60. Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout
ratio is constant. What is the firm's maximum rate of growth?
A. 7.44 percent
B. 7.78 percent
C. 9.26 percent
D. 9.75 percent
E. 10.90 percent
61. If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can it
maintain assuming that no additional external equity financing is available.
A. 10.23 percent
B. 10.49 percent
C. 10.90 percent
D. 11.27 percent
E. 11.65 percent
62. Major Manuscripts, Inc. is currently operating at maximum capacity. All costs, assets, and current
liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant.
How much additional debt is required if no new equity is raised and sales are projected to increase by 8
percent?
A. -$157
B. -$68
C. $241
D. $348
E. $367


63. Major Manuscripts, Inc. is currently operating at 85 percent of capacity. All costs and net working



67. The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone, Inc. are constant.
Sales are expected to increase by $1,062 next year. What is the projected addition to retained earnings for
next year?
A. $92.34
B. $188.55
C. $1,909.16
D. $2,144.34
E. $2,386.08
68. Assume that Fake Stone, Inc. is operating at full capacity. Also assume that all costs, net working capital,
and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant.
What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?
A. $19,800
B. $21,070
C. $23,600
D. $24,240
E. $26,810
69. Assume that Fake Stone, Inc. is operating at 88 percent of capacity. All costs and net working capital
vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are
projected to increase by 13 percent?
A. $19,600
B. $20,406
C. $21,500
D. $21,667
E. $22,148
70. Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets, costs, and current
liabilities vary directly with sales. The dividend payout ratio is constant. What is the external financing
need if sales increase by 12 percent?
A. -$318.09

A. -$1,214.48
B. -$804.15
C. -$397.19
D. $201.16
E. $525.38

75. Hungry Howie's is currently operating at 78 percent of capacity. What is the full-capacity level of sales?
A. $21,106.00
B. $21,580.62
C. $22,179.49
D. $24,506.17
E. $25,301.91
76. Hungry Howie's is currently operating at 82 percent of capacity. What is the total asset turnover ratio at
full capacity?
A. .68
B. .78
C. .95
D. 1.29
E. 1.46


77. Hungry Howie's is currently operating at 96 percent of capacity. The profit margin and the dividend
payout ratio are projected to remain constant. Sales are projected to increase by 3 percent next year. What
is the projected addition to retained earnings for next year?
A. $1,309.19
B. $1,421.40
C. $1,884.90
D. $2,667.78
E. $3,001.40
78. Hungry Howie's is currently operating at full capacity. The profit margin and the dividend payout ratio


84. Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales
approach. The pro forma has a projected external financing need of -$5,500. What are the firm's options
in this case?

85. Smith & Daughters is getting ready to compile pro forma statements for the next few years. How can
the managers establish a reasonable range of growth rates that they should consider during this planning
process?

86. The most recent financial statements for Watchtower, Inc. are shown here (assuming no income taxes):

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's
sales are projected to be $5,002. What is the amount of the external financing need?
A. $197
B. $203
C. $211
D. $218
E. $223


87. The most recent financial statements for Last in Line, Inc. are shown here:

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992 was paid, and the
company wishes to maintain a constant payout ratio. Next year's sales are projected to be $21,830. What
is the amount of the external financing need?
A. $12,711
B. $13,333
C. $13,556
D. $13,809
E. $14,357

E. $6,666.67
91. Consider the income statement for Heir Jordan Corporation:

A 22 percent growth rate in sales is projected. What is the pro forma addition to retained earnings
assuming all costs vary proportionately with sales?
A. $6,299
B. $7,303
C. $7,890
D. $8,011
E. $8,164
92. The Soccer Shoppe has a 7 percent return on assets and a 25 percent payout ratio. What is its internal
growth rate?
A. 3.72 percent
B. 4.08 percent
C. 4.49 percent
D. 5.23 percent
E. 5.54 percent
93. The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio. What is its sustainable
growth rate?
A. 18.68 percent
B. 19.25 percent
C. 19.49 percent
D. 20.39 percent
E. 22.00 percent


94. Consider the following information for Kaleb's Kickboxing:

What is the sustainable rate of growth?
A. 13.87 percent

B. 14.46 percent
C. 14.97 percent
D. 15.33 percent
E. 15.74 percent


99. A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent. The ratio
of total assets to sales is constant at 1, and the profit margin is 10 percent. What must the debt-equity ratio
be if the firm wishes to keep that ratio constant?
A. 0.05
B. 0.40
C. 0.55
D. 0.60
E. 0.95
100.A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent.
The current profit margin is 10 percent and the firm uses no external financing sources. What must the
total asset turnover rate be?
A. 0.87 times
B. 0.90 times
C. 1.01 times
D. 1.15 times
E. 1.30 times
101.Based on the following information, what is the sustainable growth rate of Hendrix Guitars, Inc.?

A. 7.68 percent
B. 9.52 percent
C. 11.12 percent
D. 13.49 percent
E. 14.41 percent
102.Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the

8. D
9. E
10. D
11. E
12. E
13. B
14. C
15. B
16. C
17. E
18. E
19. D
20. B
21. C
22. D
23. D
24. E
25. C
26. B
27. C
28. D
29. C
30. D
31. D
32. D
33. D
34. A
35. D
36. C


66. C
67. D
68. B
69. A
70. E
71. C
72. E
73. E
74. A


75. C
76. E
77. B
78. B
79. B
80. E
Feedback: Refer to section 4.4
81. Working capital, fixed assets, and external financing must coordinate with and be able to support a firm's sales growth. If, for example,
a projected increase in sales requires external financing when no such financing is available, then the firm cannot grow at the desired rate.
Understanding the implications of both the internal and the sustainable growth rates helps managers understand the need to limit growth so that the
firm does not attempt to outgrow its resources.

Feedback: Refer to section 4.4

82. The four factors are:

Feedback: Refer to section 4.4
The implication is that firms are limited to a rate of growth equal to the internal growth rate so long as external financing remains limited at its
current level. In other words, the internal growth rate is the maximum rate of growth a firm can achieve based on internally generated funds.

102. E
103. B


04 Summary
Category
AACSB: Analytic
AACSB: N/A
AACSB: Reflective thinking
Difficulty: Basic
Difficulty: Intermediate
EOC #: 4-12
EOC #: 4-13
EOC #: 4-14
EOC #: 4-15
EOC #: 4-16
EOC #: 4-17
EOC #: 4-18
EOC #: 4-19
EOC #: 4-20
EOC #: 4-21
EOC #: 4-23
EOC #: 4-25
EOC #: 4-3
EOC #: 4-4
EOC #: 4-5
EOC #: 4-6
EOC #: 4-8
EOC #: 4-9
Learning Objective: 4-1

# of Questions
55
43
5
69
34
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1
1
1
1
1
1
1
1
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1
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50
15
34
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106
7